The strategic role of procurement

The new President of the Irish Institute of Purchasing and Materials Management, Gary Shanley, explains how procurement has become a critical business function.

As a critical business function, procurement has the ability to influence corporate profitability when it is operating at a strategic level in firms. However, the new President of the Irish Institute of Purchasing and Materials Management, Gary Shanley believes the contribution of procurement at both operational and strategic levels has yet to achieve its maximum level.

“Over the past few years’ procurement has begun to play an increasingly important role in the strategy of the firm,” said Shanley. “This is more accurate than would have been the case in the past. This leads to an important question as to what the impact is of an expanded and strategic role for the procurement function.” 

Shanley claims there are three distinct types of procurement strategy:

•   specific strategies employed by the procurement function i.e. single sourcing;

•   its role in supporting the strategies of other functions and of the firm as a whole;

•   the utilisation of procurement as a strategic function of the firm.

Integrating procurement strategy

Procurement strategy must be supportive of corporate and functional strategies and it is critical that corporate management acknowledges the vital role procurement is capable of playing in developing the competitive advantage of the firm.

“Corporate objectives and strategy must be connected to the firm’s future objectives and further to that, the objectives of the procurement function need to be defined,” said Shanley. Strategic Procurement’s contributions to corporate strategic planning include, but are not limited to, the following:

•   Monitoring supply market trends;

•   Interpreting the impact of these trends on the firm;

•   Identifying the materials and services required to support company and strategic business unit strategies.

Procurement as a strategic function

The movement of the procurement function from a “passive” or reactive role to strategic role is becoming ever more prevalent across organisations and industries. In many cases, top management has realised procurement’s profit-generating capability. 

In addition, there are many internal factors that influence the perception of procurement, for example, management style, the depth of procurement’s other responsibilities, internal politics the distribution of decision making and the firm’s profitability. An increased level of sophistication within the procurement function enables the firm to fully integrate procurement into corporate strategy.

Specifically, strategic procurement can develop optimal material specifications, monitor and forecast changes in external source markets, share information with suppliers, identify critical materials and substitutes, identify key suppliers that can support product design, and develop material sourcing and contingency plans to support new product development and introduction. 

Shanley states that in order to integrate procurement strategies and corporate strategies, the procurement function must first develop to a level where it is recognised as a strategic area of the firm. “It must assume a proactive role in working with other functions to formulate and implement competitive strategy, to minimise barriers between procurement and other functions,” said Shanley.

“The opportunity is now there for Strategic Procurement to act as a strategic entity and make its strategic contribution to the success of a firm. It is likely to only continue in that vein.”